Green bonds are fixed income financial instruments that are meant to raise funds for investment in environmentally sustainable and climate-suitable projects. They are usually given with tax incentives to woo the investors.
Green bonds are sometimes also referred to as climate bonds and are seen as a viable investment option - regardless of investors' level of inclination towards environment.
Green bonds are used to raise money for setting up of green infrastructure. These bonds fund projects that work in the areas of energy efficiency, prevention of pollution, sustainable agriculture, fishery, forestry, clean transportation and clean water.
They are also used to fund the cultivation of environment-friendly technologies and the mitigation of climate change.
Because of their inclination towards environmental sustainability, these bonds command a relatively lower cost of capital in comparison to regular bonds.
A sovereign green bonds framework was formulated for two key objectives. The first one was to adhere to Nationally Determined Contribution (NDCs) targets adopted under the Paris Agreement, and the second was to attract global and domestic investments in eligible green projects.
Green bonds framework in India
On November 9, 2022, Union Finance Minister Nirmala Sitharaman gave her final approval to the above-mentioned sovereign green bonds framework. The idea was to use proceeds from these bonds in public sector projects that help in reducing carbon intensity of Indian economy.
It is vital to mention here that the Reserve Bank of India (RBI) on January 6 announced that it will auction sovereign green bonds in two tranches of ₹8,000 crore each.
The auction will be held on January 25 and February 9, and the funds so received will be invested in environment-friendly projects. At each of the two auctions, half of the bond units will be of 5-year tenure and the remaining half of 10-years.
|Date||Amount ( ₹crore)||Tenor|
|Jan 25, 2023||8,000||5-year ( ₹4,000 crore)|
|10-year ( ₹4,000 crore)|
|Feb 9, 2023||8,000||5-year ( ₹4,000 crore)|
|10-year ( ₹4,000 crore)|
The green bonds will be issued through uniform price auction and five percent of the total amount of bonds will be reserved for retail investors. These bonds will be eligible for trading in the secondary market.
Creating this framework was part of the plan espoused during the Budget 2022-23 by FM wherein she stated that green bonds will be issued for mobilising resources for green projects.
As part of the framework a Norway-based agency CICERO was appointed to evaluate and certify India's green bonds. The agency has rated India's green bonds framework as 'medium green' with a 'good' governance score.